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ArcelorMittal holds cash ready for growth

Allan Seccombe | Wed, 10 Feb 2010 14:42

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[] -- ARCELORMITTAL South Africa (SA) is hanging onto cash of R4.3bn to give it the firepower to conclude the possible acquisition of the Zimbabwean steel operation Zisco and make its first foray into iron ore, management said on Wednesday.

A decision from the Zimbabwean government was expected in December last year on the sale of the Zisco steel plant, which has a dedicated iron ore mine within 20km of the plant, ArcelorMittal CEO Nonkululeko Nyembezi-Heita told a media conference.

It’s not clear when a decision is expected, she said, declining to give any details on what ArcelorMittal’s offer was. ArcelorMittal was one of two companies shortlisted to acquire the company, which is 70% owned by the Zimbabwean government. The thinking is that Zisco will provide ArcelorMittal access to landlocked African countries.

South Africa’s largest steel producer, which has capacity of eight million tonnes annually, is comfortable with its current supply of iron ore, but one of the sources, the Thabazimbi mine owned by Kumba Iron Ore and from which ArcelorMittal draws around 2.5 million tonnes of ore a month is coming to the end of its life.

The company also sources about 10% of its iron ore needs from other producers in South Africa.

Thabazimbi will operate until 2014 with a possible extension to 2016. The ore from the mine, one analyst said, is used to dilute the high phosphorous levels in the 6.25 million tonnes ArcelorMittal secures from Kumba’s Sishen mines at cost plus three percent.

The analyst asked Nyembezi-Heita what ArcelorMittal’s plans were to replace Thabazimbi ore. The remaining life of mine there gave ArcelorMittal enough time to decide on how to blend its ore and find another source, she said.

ArcelorMittal’s plans to secure low-cost iron ore from Kumba’s nine million tonne Sishen South mine came to naught in a long-running arbitration. ArcelorMittal has a favourable offtake deal with Kumba on the production from the Sishen mine and Thabazimbi. It does not extend to any new project developed by the Anglo American subsidiary.

“Our focus was on Sishen South, but now that it is out of our reach it does mean our efforts [to find another source of iron ore] need to be redoubled,” Nyembezi-Heita said.

ArcelorMittal decided in December not to pursue the matter and look for alternative sources of ore.

One of the possible strategies is to develop an iron ore mine in South Africa, either alone or in a joint venture or securing an offtake agreement.

A number of junior black economic empowerment groups which have been granted prospecting rights on iron ore properties have approached ArcelorMittal, but there is nothing definite on the table, Nyembezi-Heita said.

Nyembezi-Heita was also asked whether ArcelorMittal’s plans – put on hold in October 2008 – to grow South African capacity to 10 million tonnes by expanding its Newcastle plant would be iced if the Zisco deal went ahead, adding capacity of up to one million tonnes from two furnaces.

“Our expansion plans are based on what the markets do,” she said, adding it was too soon to comment on expansion plans.

The Zisco iron ore is not of high enough quality to justify the expense of transporting it to South Africa, she said.

Anglo American is looking at its Scaw steel operation in South Africa. ArcelorMittal would be interested in buying certain parts of it if it was sold in segments. If Anglo wanted to sell it as a whole unit, the likelihood of ArcelorMittal being involved in any transaction with Anglo would be “much diminished,” she said.

Another area ArcelorMittal wants to address is securing cheap hard coking coal. It currently uses around 1.1 million tonnes of coking coal a year at reduced capacity of 70-80%, but at full capacity it would consume 1.8 million tonnes a year. About half of this is sourced from soft coking coal produced in South Africa mainly by Exxaro Resources. The hard coking coal is imported from Australia.

ArcelorMittal has bought a 16% stake in Coal of Africa Ltd (CoAL) for R404m and the option to acquire 2.5 million tonnes a year of metallurgical coal. CoAL has a number of coal prospects in South Africa which it is developing and testing work is needed on the suitability of its deposits for ArcelorMittal’s needs.

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